Over recent decades, recoveries from U.S. recessions have become steadily weaker and weaker. Over these same decades, executive pay has been steadily soaring. Could these two trends be somehow related?
By Sam Pizzigati
Shocking new economic realities don’t suddenly jump up onto our nation’s front pages. They creep up, over time. One shocking new reality has now begun that creeping. America’s newspapers have begun reporting that our nation’s largest corporations — at a time of continuing Great Recession for average American families — are sitting on colossal stashes of cash.
That cash —$1.8 trillion in all, says the Federal Reserve, if you throw in cash-equivalent assets — could be going into investments, notes a New York Times analysis, that create jobs or help companies develop better products and services. But our cash-rich corporations have shown virtually zilch interest in making these sorts of economically productive investments.
In fact, only 0.7 percent of the nearly 1,000 chief financial officers CFO Magazine surveyed last month say they expect to hire more full-time workers any time soon. Outside of “necessary maintenance,” one top Standard and Poor’s analyst told the Wall Street Journal earlier this month, companies “aren’t spending much on anything” internal.
So what are corporations doing with their towering mountains of cash? They’re using those dollars, says the Washington Post, “not to hire workers or build factories, but to prop up their share prices.”
The propping details vary by corporation. Some companies like Hewlett-Packard and Pepsico are pumping cash into buyouts of other companies. Others like Microsoft and McDonald’s are funneling cash to shareholders, via higher dividends. And still others are “buying back” shares of their own stock.
None of these moves create jobs or offer much help to average American households. Corporate takeovers, for instance, almost always result in job cutbacks, not increases. Dividends certainly do help shareholders, but most shares of corporate stock belong to the already affluent, not average families.
The top 1 percent of American households, as NYU economist Edward Wolff noted this past spring, own 49.3 percent of all stock and mutual funds. The bottom 90 percent? They own just 10.6 percent of the nation’s stock wealth.
Over two-thirds of middle-class Americans, Wolff adds, hold less than $5,000 in stock, either directly or indirectly via retirement accounts. For these average Americans, dividend hikes mean no more than a few extra dollars a year.
Stock buybacks have the same impact. By making a company’s shares more valuable on Wall Street, these buybacks merely enrich already rich shareholders. For everyone else, buybacks represent a total waste of corporate resources.
Why are so many corporations plowing their excess cash into mergers and dividends and buybacks instead of jobs and research and development? The news reports of recent weeks haven’t generally been too helpful here.
Businesses, speculates the New York Times, may be too “worried” about the economy slipping backwards to make productive investments. Corporations, suggests the Wall Street Journal, are waiting to see if “demand stabilizes.”
Amid these musings, a much more obvious explanation goes unnoted. Top corporations are plowing their cash into mergers, buybacks, and dividends because the executives who run these corporations have all the incentive in the world to do just that.
Top executives today don’t get rich making the sorts of investments that create jobs and make their companies more efficient and effective. Those investments, after all, may take years to produce positive results. Instead, 21st century execs take the fast track to fortune. They manipulate their corporate share price. The higher and quicker their share price rises, the bigger their personal windfall — since top execs get the vast bulk of their pay in stock-related compensation.
A generation ago, corporate executive pay didn’t work that way. Corporations, before the 1980s, gave out far fewer and smaller stock awards. With no fabulous stock jackpot to cash in at the end of the rainbow, executives had no great incentive to manipulate share prices.
Since then, stock-based awards have sent executive pay soaring. After adjusting for inflation, as an Institute for Policy Studies report recently noted, CEO pay last year more than doubled the CEO pay average for the 1990s and more than quadrupled the CEO pay average for the 1980s.
Since the 1980s, the economic data show, recoveries from America’s recessions have also been getting weaker and weaker. The share price manipulation strategies that work just fine for executives aren’t working for everyone else. America hasn’t been growing out of recessions. America has been lurching
Could our lawmakers do something to end, or significantly reduce, the pay incentives that encourage CEOs to get rich quick at the expense of real recovery?
Lawmakers certainly could — if they dared to leverage the power of the public purse. Almost every major U.S. corporation currently profits big-time off that public purse, either via government contracts or subsidies or tax breaks. Lawmakers, if they chose to deny these benefits to companies that pay execs excessively more than workers, could turn corporate pay incentives upside-down.
Corporate CEO pay last year ran nearly 300 times average worker pay. If lawmakers decided to deny our tax dollars to companies that pay execs over 25 times worker pay — the corporate pay ratio back in the mid 20th century — execs would suddenly have little incentive to play their merger, buyback, and dividend games. Why bother? No juicy jackpot would any longer beckon.
With no incentive to swing for the jackpot fences, these execs just might find themselves doing what they should have been doing all along: help figure out ways to produce the products and services that consumers truly value.
Congressional lawmakers, this past summer, actually took a necessary first step in this pay-ratio direction. The new financial reform bill signed into law in July includes a provision — plugged in by New Jersey senator Bob Menendez — that requires all publicly traded corporations, not just financial institutions, to reveal the pay gap between their top exec and most typical workers.
Securities and Exchange Commission staffers have begun writing the regulations necessary to enforce this new mandate. But they’re getting pounded — by corporate lobbyists furious that they let the mandate slip into law. The lobbyists are demanding Menendez mandate regs that water the mandate down.
This SEC rule-making battle over the Menendez pay ratio mandate will drag into next year. The AFL-CIO, America’s labor center, will be mobilizing on the mandate’s behalf. Labor understands the stakes at play here. To get the economy right, we need to get corporate pay incentives right, too.
Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Read the current issue or sign up to receive Too Much in your email inbox.